How would a fund manager decide to buy Reliance?  Understand the company’s financials in great detail, know the happenings in the energy sector and have long meetings with the management. That is fundamental investing – a time tested style that will make money if the manager has a good understanding of his stocks and sectors.  But fundamental analysis is not the only way to make money.  Quantitative investing – where the manager builds a mathematical model to identify patterns in Reliance stock – has been used worldwide for more than 20 years with consistently good results.  With quantitative investing options being available for the retail investor in India now, we discuss the range of managers out there and what they really do.

Types of Quant Investors

Just as fundamental managers come in different colors and sizes – value, small-cap, large-cap and others – so do quants.  Here is how four types of quant managers in the market would analyze Reliance today:

Technical quants - Technical quants or “momentum players” would look at charts and graphs of Reliance stock, analyze the trend in the stock price (the “momentum”), and decide where Reliance will move in the short-term.  When people think of quants, they usually think of technical quants.

High frequency quants - High frequency quants or “intra-day” guys would also look at movements in Reliance’s stock price but focus on buying and selling the stock intra-day rather than over the short-term.   If you have heard of “statistical arbitrage”, this is usually the world of high frequency quants.

Systematic quants - Systematic or fundamental quants would gather years of balance sheet data and income statement data for Reliance and other companies in the energy sector, and construct ratios like price-to-book for these firms to determine what the value of the company is.  They would then use a mathematical model to compare companies using this ratio and decide how much of Reliance to hold, relative to other energy companies.  This style is fundamental analysis using quantitative tools.

Macro quants - Macro quants would not look at Reliance individually, but at the whole energy sector or Indian market.  They would collect long histories of interest rate, commodity and equity data and build macroeconomic models to forecast how the Indian market and the energy sector will do. 

While none of these descriptions do justice to the rigor of a quant process, they give us a flavour for how to think about quantitative analysis and what is common to quant managers:

• An investment decision based on a quantitative or mathematical model
• An investment process based on data rather than subjective analysis
• An approach where the model makes the final decision, not the manager’s personal bias
• A portfolio with a large number of securities in comparison to fundamental managers
• A process that rarely involves subjective analysis of a merger or meetings with management